12th UBAYA INTERNATIONAL ANNUAL SYMPOSIUM ON MANAGEMENT
ISBN: 978-979-99365-9-2 448
Empirical Evidence of Private Debts in Indonesia
Erick SugitoSuharso Alumnus of Surabaya University
ericksugito@gmail.com
Deddy Marciano Surabaya University marciano@staff.ubaya.ac.id
EndangErnawati Surabaya University endangernawati@yahoo.com
Abstract- This study aims to examine the effect of firm size, fixed asset ratio, market to book value of equity ratio, debt maturity, and public ownership to the use of private debt on corporate manufacturing sector in IDX the period 2010-2012. This study uses the quantitative approach to multiple linear regression analysis model. The study findings suggest that firm size significant positive effect on the use of private debt, firm size quadratic significant negative effect on the use of private debt, fixed asset ratio exhibited significantly positive effect on the use of private debt, market to book value of equity ratio is not significant positive effect on the use of private debt and significant positive effect on the use of private debt, debt maturity exhibited significantly positive effect on the use of private debt and not significant positive effect on the use of private debt, public ownership exhibited is significantly positive effect on the use of private debt.
Keywords: Private Debt, Asymmetric Information Theory, Agency Theory.
Background
According to creditor, debt can be categorised into two different kinds of type namely private debt and public debt. Private debt is a loan that can be given by finance institution to private firm while public debt is a loan that can be given by society to firm. James and Weir (1988) explained compared to public debt, private debt had several advantages.
First of all, private debt is able to reduce asymmetric information compared with public debt. The opinion was supported by Eugene Fama (1985) who said private debt had an information access consisting the borrowers while public debt was unable to have it. On the other hand, if an individualowns to the society (public debt), the information regarding borrowers would be difficult to get or could be controlled through debt rating government agencies, analyst’ reports, and independent auditor. Secondly, the finance institution has a better position to monitor regarding borrowers compared to obligation security issuer. Thirdly, the finance institution is able to keep firm secret like firm investment opportunity. Lastly, by using private debt, someone could avoid a longer process and higher cost than public debt issuer.
Some researchers have discussed about loan structure such as (Denis danMihov, 2003), (Krishnaswarni, SpindtdanSubramaniam, 1998), (Dhaliwal, Inder, danRaynolde, 2002), (Lin, Ma, and Xuan, 2013), are bank loans different?: Some evidence from the stock market (James and Weir, 1988), public debt, bank debt, and non-bank private debt in emerging and developed financial markets (Yu, Johnson, andTzon, 2008).
12th UBAYA INTERNATIONAL ANNUAL SYMPOSIUM ON MANAGEMENT
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Theoretical Study
A major firm size is described with more stable free cash flowdue to fixed targets in a particular market that leads to steady sale. On the other hand, bank does not allow big loan to big firms because big firms which collapse would possibly affect bank losing considerable money. Therefore, big firms will prefer public debt (Dennis and Mihov, 2003). Small firms tend to experience unstable free cash flow. This condition is caused by the limited circumstances where thesefirms operate. Furthermore, small firms are difficult to get an access to capital market (public debt), like huge cost of capital/flotation cost. Hence small firms prefer to use private debt (Denis and Mihov, 2003). It is hypothesized that the firm size is indicated to influence negative effect on private debt usage.
Firm size in quadratic would determine the loan capability to private debt or public debt. Quadratic model would explain from two sides. The first one is positive linear, a small firm using private debt, because there is limitation to access the capital market because of flotation cost. When the firm size reaches some particular point, new firm can access to capital market and automatically decrease its portion of private debt utilisation.
Finance institution (bank) needs fixed assets as a guarantee when firm utilise private debt (Madura, 2007: p394), similar with the opinion, Yu Johnson, and Tzon (2008). The reason why bank needs guarantee is because when bank gives a loan to medium quality borrowers, then bank needs to make sure that the loan has to be secured with collateral (Denis and Mihov, 2003). To sum up, it is hypothesized that tangible asset is assumed to positively affect private debt usage.
According to Jansen in Fatmasari (2010), firms with high investment opportunity experience enormous growth and active investigation. High investigation activities will respond the increasing of opportunity. When the opportunity is increasing, manager would manage the whole projects with high NPV. This is because other managers want to control big assets that suit their remuneration. This leads managers to choose projects which are suitable with managers’ wants, unfortunately the stockholders’ wants are not always the same as the managers. This leads to agency problem that can be reduced if the stockholder apply cross monitoring through private debt. As a result, the company with high investment would prefer to use private debt. Private debt usage is able to monitor every decision made by manager (Denis and Mihov, 2003; Krishnawarni, et al, 1998). From this explanation, it can be hypothesized that the growth opportunity seems to be positive relationship to private debt user.
Debt maturity is a date when lenders will get the repayment including the loan interest. Debt maturity can be measured by long term debt ratio toward the total debt (Lin, Ma, and Xuan, 2013). The payment due varies from 365 days to 5 years. The bigger debt maturity the major the uncertainty. The bank does not allow to give uncertain loan because the bank fund resources do not want to experience the uncertainty. The resources are from short term income like deposit, savings, etc. The bank funding resources can only be given to short term loan too (James and Weir, 1988). Therefore this research hypothesizes that debt maturity is indicated negative regarding the private debt usage.
The big stockholder prefers to choose private debt as firm funding because the stockholder wants the third person or institution which can monitor the decision made by manager, usually finance institution. With finance institution that monitors, it will reduce asymmetric information and agency problem (Meginson, 1997). Therefore, it is hypnotized that public ownership shows positive relation to the private debt usage.
Explanation and Result
12th UBAYA INTERNATIONAL ANNUAL SYMPOSIUM ON MANAGEMENT
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This means that big firms experience stable sale which produces abundant free cash flow. abundant free cash flow is more likely used by managers to their own interest (contradictory practice in order to hold the stockholder), such as upgrading facilities, selling firm’s product cheaply to another firm which belongs to the same manager. Hence, private debt has monitoring position where stockholder do their cross monitoring through private debt because it is more concerned about borrower compared with public debt.
Table 1 and regression test result
Variabels
Model 1 Model 2
Coefficient T-stat Coefficient T-stat Constant -2.849134*** -11.195 -0.522211*** -5.7828 Firm Size 0.921631*** 11.0321 0.177534*** 6.2537 Firm Size Kuadratik -0.071349*** -10.893 -0.013826*** -6.2784 Fixed Asset Ratio 0.173536*** 5.24425 0.051981*** 4.8324
MTBR 0.001179 0.58266 0.001965*** 2.7208
Debt Maturity 0.133399*** 5.90478 0.005185 0.6527 Public Ownership 0.058208 1.42958 0.101022*** 6.5459
Adj. R-Squared 0.96326 0,997088
F-Stat 469.1877*** 6114.841***
FIRM SIZE QUADRATIC variable in model 1 and 2 influenced significantly negative to private debt within quadratic. This relationship is matching with Yu, Johnson, and Tzon ( 2008); Lin, Ma, Xuan’s research (2013) which said found significant positive while Denis and Mihov (2003); James danWier (1988); Krishnaswarni, Spind, and Subramaniam (1999); Dhaliwal, Inder, and Raynolde (2011) found significant negative.
This means small firm will utilise private debt but, when the company is growing in a particular point, it will reduce private debt slowly and start using public debt. The similarity regression private debt model 1 is Ltl/Ltd = -2.849134 + 0.921631 FIRMSIZE – 0.071349 FIRM SIZE KUADRATIK, then using derivative function Ltl/Ltd’ = 0.921631 – 0.142698 LTA. The result from LTA is = 0.921631 / 0.142698 = 6.458611. Therefore, the optimal point is approximately 6.458611 or in the asset value is IDR 2,874,822,266,766 / IDR 2,87trillion.
The TANGIBLE ASSET period in model 1 and 2 shows significant positive impact to private debt. This is matching with Yu, Johnson, and Tzon’s research (2009) which said the significant positive effect compared to significant negative which was said by Denis and Milhov (2013), Dhaliwal, Inder and Raynolde (2011).
Firms which own fixed assets tent to utilise private debt usage. It means the bigger the owned asset, the bigger its proportion of private debt. This condition appears because the frim with growing asset is easier to get loan because the value of asset used to guarantee is bigger accompanied by bank or finance institution’s big trust.Madura (2007: p394; Yu, Johnson, and Tzon, 2008) said that the bank needs real terms of guarantee when they agree to give loan to a company.
According to t-test, the hypothesis which says that Market to book value of equity ratio (MTBR) in model 1 affecting positive influence private debt user is rejected while MTBR in model 2 sees there is a positive and significant relationship in private debt usage. This is similar with Dhaliwal, Inder and Raynolde (2011); Yu, Johnson, and Tzon (2008); Krishnaswarni, Spindt, and Subramaniam’s research (1999)which said that market to book value of equity ratio influenced positive impact to private debt usage.
12th UBAYA INTERNATIONAL ANNUAL SYMPOSIUM ON MANAGEMENT
ISBN: 978-979-99365-9-2 451
reduced when the stockholder operate cross monitoring through private debt. As a result, firms with high growth opportunity tend to choose private debt. Using private debt allows them to monitor every decision made by manager.
Debt Maturity in model 2 brings significant positive to private debt usage while Debt Maturity in model 2 shows positive but not significant result. This is contradictory with James and Wier’s research (1988) which resulted significant negative impact on private debt usage. The longer maturity the bigger the uncertainty the debt repayment. Because of that monitoring is needed. Monitoring aims to control the availability of debt repayment. During controlling process, bank can evaluate the firm loan that make them able to reduce the uncertainty.
According to the regression result, there is a hypothesis describes Public Ownership in model 1 showing positive impact to private debt is rejected, while Public Ownership in model 2 results significant and positive impact to private debt. This means stockholder prefers to choose private debt as source of funding. The bigger the public stock ownership the bigger the mechanism of controlling management behaviour. The existence of public stockholder will ease monitoring, intervention or some discipliner impact to managers resulting appropriate acts as the stockholder wants. The public stockholder wants the third person, which is the finance institution to monitor every decision made by manager. By corporation with finance institution, the asymmetric information and agency problem can hopefully be reduced.
Conclusions
The study found that firm size significant positive effect on the use of private debt model 1 and 2, firm size quadratic significant negative effect on the use of private debt model 1 and 2, fixed asset ratio exhibited significantly positive effect on the use of private debt model 1 and 2, market to book value of equity ratio is not significant positive effect on the use of private debt model 1 and significant positive effect on the use of private debt model 2, debt maturity exhibited significantly positive effect on the use of private debt model 1 and not significant positive effect on the use of private debt model 2, public ownership exhibited is not significantly positive effect on the use of private debt model 1 and significantly positive effect on the use of private debt model 2.
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12th UBAYA INTERNATIONAL ANNUAL SYMPOSIUM ON MANAGEMENT
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text. Keep in mind that everything will be reduced to
75%. Therefore, 9 point should be the minimum size
of the lettering. Lines should preferably be 0.2 mm
(0.1") thick. Keep figures as simple as possible.
Avoid excessive notes and designations.
Figure 1. Caption of a typical figure. Photographs will be scanned by the printer. Always supply original photographs.